Introduction to NPS account

Balwant Jain

The National Pension Scheme (NPS) was introduced for salaried people in 2004 as an alternative to employee provident fund scheme to move from defined benefits system to defined contribution for retirement benefits. The scheme was extended to all the persons later on. Of late interest of people has grown substantially in NPS. Since subject of NPS is very wide in itself and can not be covered in one article to in order to heal readers understand NPS thoroughly I have decided to write a series of articles covering entire gamut of various aspects of NPS. Here is first article on basics of NPS

What is an NPS

Since the government in India does not run any social security scheme to take care of its citizen after retirement, NPS was introduced by government under which you can contribute money in order to accumulate funds for your retirement corpus with low cost. This is specifically useful for self employed category of persons who do not have scheme similar to provident fund scheme available for salaried people in organised sector.

Who can open the NPS account?

Any individual who is a citizen of India can open account under NPS. So, an NRI who has retained his Indian passport can also open this account.  The rules have been amended on October 2019 to allow Overseas Citizen of India to open the NPS account. Unlike PPF account where the criteria for opening PPF account is based on your residential status under Foreign Exchange Management Act (FEMA) where even a foreign national who has been working in India can open a PPF account here but he can not open an NPS account here as though residing in India he still continue to be non Indian Citizen. For opening NPS account, a person should have completed 18 years of age on the date of opening the account. Initially the upper age limit for entry into NPS account was set at 60 years but the same has later on been extended to 65 years in November 2017 in view of the fact that many people continue to work beyond 60 and till 65 even after retirement. A person who has been declared an insolvent and has not been discharged as insolvent cannot join this scheme. A person of unsound mind also cannot open account under NPS.

For such late joiners the NPS account will  mature at the subscriber reaching the age of 70 however for those who join before 60 years, NPS account matures on on completing 60 years of age. A subscriber to NPS account has an option to extend this beyond 60 years up to 70 years of age.

Though you are allowed to open a PPF account for your minor child as a guardian this is not possible in the case of NPS as the it can only be opened by a major persons. Moreover in case of PPF, you can contribute to the PPF account 

Limit on contribution to NPS account

Unlike a PPF account where you cannot deposit more than 1.50 lakh in a single PPF account in a year, no such restriction is applicable in case of an NPS account. So  you are allowed to put in any amount in your NPS account. It may be noted that even if the tax laws have some restrictions on the amount up to which you can claim the tax benefits for contribution made in the NPS account, you can still deposit any amount in your NPS account beyond the limit up to which tax benefits are available.

Where the account can be opened?

The NPS account can either be opened online or offline. The online account can be opened the following link of NDSL. https://enps.nsdl.com/eNPS/OnlineSubscriberRegistration.html?appType=main

Or this link of Karvy Fintech https://enps.kfintech.com/registration/

For facilitating opening of an NPS account offline the government has nominated  many entities. Such entities called Point Of Service (POS0

include various nationalized banks as well as private banks. Additionally some more entities like Indian Postal Department, Stock Holding Corporation, UTI Asset Management Company and UTI Technology Services Limited etc. have also been appointed for the purpose of opening an NPS account. I will discuss in detail the process of opening an NPS in subsequent article. These entities have in turn nominated a few branches as service providers and are called POP-SP.

So, you can see that many entities have been nominated for facilitating of opening the NPS account, hence you will not find it difficult to identify the POP for opening your account.

Joint holding and nomination

The NPS account can only be opened in a single name however the rules allow you to appoint maximum of three nominee for your NPS account. The nominee can be appointed at the time of  opening the NPS account. Since it is a prudent practice to have nominee for all your investments, you should appoint nominee for your NPS account as well. Nominee can be a major or a minor but in case of minor being appointed as nominee, you need to furnish details of the guardian with date of birth of the minor. While nominating more than one nominee, you need to specify shares of each nominee in percentage terms. Please ensure that share is not mentioned in fraction and sum of all the nominees add to 100%.

Can one  have both, employee provident fund account and NPS account?

Only an employee can join an employee provident fund account initially though he can continue to retain it even after leaving the employment or after retirement but NPS account can be opened by any one whether salaried or not. So is the case with PPF. In fact a salaried person can have all these account together at the same time.

Balwant Jain is a tax and investment expert and can be reached at jainbalwant@gmail.com and @jainbalwant his twitter handle.

All you wanted to know about additional dedcution of Rs. 50,000/- for NPS

My colleague Susan, who is retiring this year, was advised to deposit Rs. 50,000/- in NPS account this year to reduce her tax liability. She approached me for guidance. Based on my interaction with her I realised that the people generally do not know much about the NPS scheme in general and about this additional deduction of Rs. 50,000/- in particular. So I decided to write this article to explain both the points.

Who can open NPS account

Any individual who is citizen of India aged between 18-60  years can open NPS account. Even an NRI can open an NPS account whereas they are not allowed to open a PPF account or extend the existing PPF account after becoming NRI. People generally put the EPS and NPS on parity and feel that they can not open this account unless their employer offers them the facility. This is not true. Any individual including a self employed person can open NPS account. So even if your employer has not implemented NPS scheme, you yourself can open the account and contribute to it, as contribution of employer is not mandatory for opening and maintaining this account. You can  open NPS account even if you are already contributing towards employee provident funds or public provident  funds.

Type and Tenure of the account

Under the scheme of NPS you can open two types of account i.e. Tier I and Tier II. Opening of Tier I account is mandatory and it is the NPS proper account. The tax benefits and restriction about tenure apply to this account only. Tier II account is voluntary and can be used to park your surplus funds pending withdrawal or transfer to Tier I account.

NPS account does not have any fixed tenure but the age up to  which you can join this account is restricted before you complete 60 years of age.  However if you want to contribute beyond the age of 60 years, as per the revised regulations notified last year , you can do so till 70 years of age provided you have given advance notice of such intention. In case you do not want to extend the contribution period, once you complete the age of 60 years, you  have to mandatorily withdraw 40% of the accumulated balance for purchase of an annuity from a Life Insurance Company in India.  The balance 60% is allowed to remain in the account which can be withdrawn anytime before you complete 70 years. The account has to be closed on completion of 70 years of age. The condition as to purchase of annuity from 40% of the corpus does not apply in case the total corpus does not exceed 2 lacs age the time you reach 60 years, in which case you can fully withdraw the balance outstanding in your account.

Tax benefits for contribution.

The tax benefits for a salaried person are available only for contribution upto 10% of his salary towards NPS within the overall limit of Rs. 1,50,000/- along with other eligible items like Life Insurance premium, school fee, repayment of home loan, NSC, PPF, repayment of home loan, ELSS etc.  In case you are self employed you can contribute to Tier I account upto 10% of your gross total income i.e. income before deductions under various Section like 80C, 80 CCD, 80 CCC, 80 D, 80 E, 80 TTA . The overall deduction available shall not exceed Rs. 1,50,000/-. For self employed the limit of 10% is proposed to be increased to 20% from next year.

Last year's  budget had provided for an additional deduction of Rs. 50,000/- for contribution towards NPS account and in respect of which a lots of confusion is prevailing. This is in addition to the existing limit of 1,50,000/-.  Let us understand this with example. Suppose aggregate of all the eligible items of deduction exceeds 1.50 lacs,  your eligibility will be restricted to Rs. 1.50. However in case if it includes any amount of your contribution of NPS which gets excluded due to this limit of Rs. 1.50 , you will be able to claim the deduction for the NPS contribution which gets so excluded upto Rs. 50,000/- from current financial year. So in case you exhaust your limit of Rs. 1.5 lacs without even taking into account NPS contribution, you can claim extra deduction for NPS upto Rs. 50,000/-. For those of you who have not yet opened their NPS account, as the limit of Rs. 1.50 lacs was getting exhausted due to other regular items, can open NPS Tier I account and claim tax benefits by depositing upto Rs. 50,000/-.. It is interesting to note that limit of 10% of salary or Gross Total income does not apply to this additional contribution of Rs. 50,000/- so for those of you who were contributing over 10% of the limit but in excess of Rs. 1.50 lacs in monetary terms  can claim the same under the new provision without actually having to make any additional contribution.

As far as contribution of the employer is concerned, the above limits of Rs. 1.50 lacs or Rs. 50,000/- do not apply and any contribution by your employer is fully deductible without any monetary cap as long as it does not exceed 10% of your salary.

Tax treatment on Maturity

Since you have to compulsorily buy an annuity for 40% of the accumulated balance on your reaching  60 years or extended period, this 40% does not become taxable at the this stage but the annuity as and when received becomes taxable under the head “Income from other sources”. Out of the  withdrawal of the balance 60% of the corpus 40% is exempt and the balance 20% will become taxable as and when you withdraw it. However if you decide to buy annuity form  60% of the corpus at retirement you do not have to pay any tax immediately.   So even if you have a very short period of service left, you can still contribute in NPS and effectively reduce your tax liability as the slab tax rate applicable to you after your retirement will be lower. Even if the slab rate is not going to change, you are still able to defer your tax liability to future.

I am sure this article will help clear the clouds of doubts in the mind of many readers.

Get started with NPS

Getting Started with NPS

All of us have heard about God but only a few have experienced the miracles which can be attributed to his presence. Same is the case with National Pension Scheme (NPS), many of us have heard about it but only a few know as to how it works.

On the basis of mails received from the readers on previous article on NPS in the columns DNA dated 15^th June 2011, I have realized that though lot of people have heard about the NPS, but not many are aware how it functions and more importantly how to open a NPS account.

In this piece I have discussed about taking the first step towards opening your NPS account.

Who can open the NPS account?

Any individual who is a citizen of India can open account under NPS. So an NRI who has retained his Indian Passport can also open this account. For opening the account under NPS, a person should have completed 18 years of age on the date of opening the account. A person who has completed the age of 60 years cannot open this account since purpose of NPS is accumulation of corpus till one reaches the age of 60 years. A person who has been declared an insolvent and has not been discharged as insolvent cannot join this scheme. A person of unsound mind also cannot open account under NPS.

Where the account can be opened?

For facilitating Indian Citizens in opening the NPS account, the Government has nominated 34 entities for the purpose. These include nationalized banks like Central Bank of India, Allahabad Bank, Syndicate Bank, Union Bank of India, and State Bank of India and its subsidiaries. In addition to the nationalized banks, the Government has nominated private banks like ICICI Bank, Kotak Mahindra Bank, Axis Bank and Yes Bank. In addition to the banks, the Government has also nominated some other entities like Indian Postal Department, Stock Holding Corporation, UTI Asset Management Company and UTI Technology Services Limited etc. All these entities are known as Points of Presence (POPs). These entities have in turn nominated a few branches as service Providers and are called POP-SP. The detailed list with contact numbers is available on website www.pfrda.org.in and www.npscra.nsdl.co.in.

So you can see that there are ample entities being nominated for opening the account, hence you will not find it difficult to identify the POP for opening your account.

How to open the NPS account?

You have to collect the Application Form for subscriber registration from any of the 34 POPs. The application form duly filled in with necessary documents for the purpose of KYC should be submitted to any of the above POP. The KYC norms are like those which are applicable for the purpose of opening your savings bank account. You have to make first contribution to your NPS account while submitting the application forms to POP-SP.

Does it have nomination facility?

While filling up the form you can appoint one or more nominees for the purpose of receiving the corpus lying to the credit of your NPS account, in case something happens to you. You can nominate up to three persons as nominees for this account. It is always advisable to have nominees in all your accounts, be it bank account or demat account. Even a minor can be appointed as a nominee here. However in case you are appointing a minor as nominee, you need to provide the details of the guardian and date of birth of the minor. While nominating more than one nominee, you need to specify shares of each nominee in percentage term. Please ensure that share is not mentioned in fraction and sum of all the shares is equal to 100%.

However unlike your bank account, you do not have the option to add someone as joint account holder under NPS. The account has to be opened in an individual’s single name.

What are the documents required?

For complying with KYC, you need to provide documents for identity, date of birth and address proof etc. Please note that you need not have a PAN card in order to make an application under NPS unless you intend to make cash contribution of Rs. 50,000 or above. For proofs of identity and address, various documents are accepted like School Leaving Certificate, water bill, electricity bill, driving license, copies of your depository account, PAN card, rent receipt and credit card statement etc. Even if you are not able to provide any of the documents listed in the application form, as a last resort you can obtain a certificate of identity and certificate of address signed by Member of Parliament, Member of Legislative Assembly, Gazetted Officer or even a Municipal Councilor.

How to select the Pension Fund Manager?

Like the POP (Point of Presence) the Government has also appointed Six Pension Fund Managers (PFM) for the purpose of management of the Funds. While filling up the application form for registration under NPS, you have to indicate your preference for the PFM. If you do not indicate your preference of the Pension Fund Manager, your application will not be processed and will be invariably rejected. The PFM appointed are Pension Fund Management Companies of various financial institutions /mutual fund houses like ICICI Prudential Pension Funds, SBI Pension Funds, Kotak Mahindra Pension Funds, Reliance Capital Pension Fund, IDFC Pension Fund and UTI Retirement Solutions.

What is Pension Retirement Account Number (PRAN)?

The Government has appointed National Securities Depositories Limited as the Central Record Keeping agency for the purpose of NPS. NSDL is responsible for record keeping of the all the subscribers under NPS. Once your application for the purpose of registration is accepted and processed, you will receive a welcome kit from NSDL along with allotment letter of a PRAN along with the PRAN Card bearing your photograph having basic details about you. You have the option of receiving your PRAN card in Hindi also and for that purpose you will have to submit some basic details in Devnagri script. Please be careful while you fill in the details in the application form for registration for NPS. In case you have committed some mistakes while filling in the details in the application form, this may cause errors in all the documents including the PRAN card. The PRAN is your unique identification for the purpose of operating this account.

The welcome kit will also contain a Telephone Identification Number (TPIN) for the purpose of accessing your NPS account through the call center number 1800-222080. The kit will also have an Internet password to access your NPS account through Internet on www.npscra.nsdl.co.in.

I hope now you will not find it difficult to open the NPS account about which you have just heard till now. Take your first step towards experiencing the benefits of NPS.

More on features of NPS in my forthcoming articles…

…watch out this space in the coming weeks!